Investing in Dividend Strips Using Dividend Derivatives
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Dividend futures trading strategy financea dividend future is an exchange-traded derivative contract that allows investors to take positions on future dividend payments. Dividend futures can be on a single company,  a basket of companies, or on an Equity index. The profit or loss the investor makes depends on the difference between the price they bought or sold the future and the settlement price.
Most dividend futures trades occur before the dividend is known, hence allowing investors to go "long" or "short" the future dividend payment. The "buyer" of the contract, is said to be "long", and the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties: Being futures contracts, they are traded on marginthus offering leverageand are dividend futures trading strategy subject to the taxes equity holders must pay when they receive dividend distribution on their stocks.
They are traded in dividend futures trading strategy financial markets, mainly in Europe,   dividend futures trading strategy  and Asia,   and several Blue chip companies and Equity Indices are available with maturities going as long dividend futures trading strategy 5 years for Equities and 10 years for Equity indices.
In Professor Michael J. He argued that these would "enhance the ability of markets to aggregate and transmit information" and that "since the level of the market index must be consistent with the prices of dividend futures trading strategy future dividend flows, the relation between these will serve to reveal the implicit assumptions that the market is making in arriving at its valuation. These assumptions dividend futures trading strategy then be the focus of analysis and debate.
Before dividend futures existed, an investor who wanted a similar exposure did so by trading a dividend swap. Dividend swaps are the over-the-counter version of dividend futures. They allow two parties to agree to swap in the future a pre-defined amount of cash against the amount of dividends paid by the underlying stock, basket or equity index. Created in the early s, dividend Swaps became very popular because they allowed equity holders to "sell" their future dividends in advance and hence hedge their future dividend stream.
The biggest players were investment banks looking to cover their future dividend exposure from derivatives positions they had on their books. The first dividend future was listed in June by the derivatives exchange Eurexa derivatives exchange, on the Euro Stoxx 50 dividends, and since then many new dividend futures were created on various exchanges. The exchange listing made these products available to wider range of investors who could not trade over-the-counter OTC.
Dividend futures can be used by investors for investmenthedging or arbitrage. Dividend futures allow investors to take a position on the future dividends paid by single names or indices such as the Euro Stoxx An investor might believe that a company's future dividend payment expectations are too high or too low and can decide to take a position in dividend futures to express his views.
By investing in a single stock dividend future, an investor has a proxy of a company's earnings. Because dividend future are finite, at one stage, the performance of the future will be driven only by the company's paid dividends rather than micro or macro economic news flow. By investing in an Index dividend future, investors have a similar exposure, except they're taking a view on a basket of companies. This is usually done to implement a macro view on future dividends in a dividend futures trading strategy or a continent.
Most equity derivatives instruments, like options, are sensitive to future evolution of dividends. In the past, the dividend future market players were pure derivatives players because they were the most sensitive to dividend outcomes. They use these futures, and before them dividend Swaps, to hedge their dividend exposure. Studies show that dividend and inflation growth are correlated, hence the use of long term dividend futures, like on indices, to hedge an investor's exposure to inflation.
Like on any asset class, investors dividend futures trading strategy take a relative value position on a market compared to another. In dividend futures, the arbitrage opportunities can be taken against its underlying stock or CDS. Going long a dividend future, for example, and short the underlying stock results in taking a position on a company's dividend yield. Another dividend futures trading strategy of arbitrage, that is common with equities, is called Index Arbitrage.
In dividend futures trading strategy futures, Dividend futures trading strategy Arbitrage consists of taking spread positions between an Index dividend futures and its components.
Historical players in this market were banks who offset the dividend risks from their structured products to their clients, mainly hedge funds, through dividend Swaps. Year saw the arrival of the first dividend futures and the collapse of the financial industry, hence market participants in dividend Swaps switched their position to dividend futures to eliminate counterparty risks.
The listing also brought new players,who were not active in the Over-The-Counter market, such as asset managers, pension funds and family offices. The market not being anymore reserved to some few specialists, volumes picked up and number of participants grew. From a hedging instrument,  dividend futures have the potential of developing as an asset class on their own. From a risk profile perspective, dividends are dividend futures trading strategy.
When a company's profit improve, dividends usually rise; when they fall dividends are cut. Dividend futures trading strategy, dividends are somewhat resilient because companies tend to smooth the variations of their dividend payments. For these reasons, research have highlighted that dividends are in between stocks and bonds in terms of risk-reward. From Wikipedia, the free encyclopedia. Retrieved 10 June Retrieved 30 Dividend futures trading strategy Retrieved 4 July Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.